A look at the latest bank credit reports by the Fed highlights poor allocation decisions by small and large banks, with small bank timing much worse.

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Monthly average Cash percent allocation of bank assets 

Right before a major hiking cycle by the Fed, both large and small banks decided to deploy deposits. 

Smaller regional banks went all in.

It was a major mistake that resulted in three US bank failures. Silvergate Bank, Silicon Valley Bank, and Signature Bank, collapsed and were taken over by the FDIC because of duration mismatch losses and runs on the banks. 

Securities in Bank Credit

Monthly average Securities in Bank Credit percent allocation of bank assets 

Securities in bank credit largely consist of Treasuries and Agencies (mortgage backed securities). 

Both large and small banks loaded up on duration risk at precisely the wrong time. Estimates of unrealized bank losses range from $625 billion up to $2 trillion. 

Residential Real Estate 

Monthly average Residential Real Estate percent allocation of bank assets 

The beginning of 2022 was an amazingly bad time to increase exposure to residential real estate. 

Small banks increased exposure more than large banks. Given price declines, most of those homes are now worth less than the mortgage.

Commercial Real Estate

Monthly average Commercial Real Estate percent allocation of bank assets 

Smaller regional banks are much more exposed to commercial real estate loans than larger banks. 

As with residential, property values are declining making risk of default greater.

Who's Holding the Losses?

Commercial Mortgage Backed Securities Index 

Not Just a US Problem

Money Supply Is Headed for 6th Month of Contraction

Please note Money Supply Is Headed for 6th Month of Contraction

Whether the Fed pledges to temporarily paper over bank losses, the losses are still real. 

Expect further contractions in credit as a result.

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